In theory and in practice, austerity fails
The intellectual basis for this madness that is destroying lives has been stripped away, writes Gene Kerrigan
Published 21/04/2013 | 05:00
Paul Curtis is an Elvis Presley impersonator from Mississippi. He allegedly sent a poisoned letter to the White House last week in an attempt to assassinate President Obama. Most weeks, that would guarantee Paul his 15 minutes of fame. Last week, however, Paul was consigned to the small print at the bottom of an inside page. Bad timing, Paul – you were up against sensation overload.
The Boston bombs and their tragic consequences, followed by the shoot-outs and the chases, the lockdowns and the siege – a Hollywood fantasy come to life. The horrific fertiliser factory explosion in Texas. The overblown Thatcher funeral, the dreary attempt to make political capital out of a dead leader.
At home, the sadness and anger generated by the Savita Halappanavar inquest and the personal, medical and political consequences. The collapse of the attempt to bully public sector workers into Croke Park II.
Rather than any of these worthy topics, let us deal with something even less sensational than Paul Curtis and his allegedly murderous letter. Let's consider the case of Carmen Reinhart and Kenneth Rogoff.
Not exactly household names, I grant you. And it would be understandable if you don't know the first thing about them – but, as it happens, Reinhart and Rogoff have had a say in your life. And now they're in a wee spot of bother.
In academic circles, Reinhart and Rogoff are superstars. Their book, This Time Is Different: Eight Centuries of Financial Folly, is regarded as a masterpiece, applauded on all sides for its depth, research and rigour.
In 2010, Reinhart and Rogoff produced an academic paper titled Growth In A Time Of Debt. It arrived just in time for politicians and bankers and media pundits. Already, the automatic reaction to the
economic crisis had kicked in. Borrow tens of billions, give it to bankers and bondholders and send the bill to the mugs.
We'd had 30 years of neo-liberal economics. That meant the dominance of the view that what's good for the bankers and bondholders, the rich and the powerful, is good for all of us. It followed that when the economy crashed we were told we'd have to sign whatever cheques and impose whatever policies the same people demanded.
Deflate the economy, force unemployment up and wages down – balance the books through austerity. Let the medium- and low-paid whine, but their sacrifices will create the conditions for recovery.
The word 'austerity' came to stand for the whole policy of making the mugs pay for the greed, recklessness and stupidity of the rich and their playmates and cheerleaders. With admirable timing, Reinhart and Rogoff's paper provided the intellectual foundation for the policy.
I downloaded the paper and I've tried to read it. Sorry, I just can't understand the academic language and many of the concepts. Reinhart and Rogoff's toenail clippings know more about economics than I could dream of absorbing.
The bottom line, explained by people who understand and wrote about the paper, is that government debt kills growth. (Even when it's private debt that has been kindly taken on by the government, as our leaders took on the bank debt.) When the debt/GDP ratio goes above 90 per cent, growth falls hugely, said Reinhart and Rogoff.
And they had lovely charts and tables to prove this. Go above the magic 90 per cent and growth falls from 3 or 4 per cent to less than 0.1 per cent.
Most days of the week – on Vincent Browne's show, on Prime Time, The Week In Politics, Pat Kenny's radio programme, Drivetime – not to mention platoons of newspaper pundits and analysts – the intellectual respectability of austerity is taken for granted.
The dominance of this 'only game in town' has been such that anyone arguing anything else is merely grumpy, a contrarian who opposes for opposition's sake.
To argue against austerity is like arguing against gravity. The rules of economics – as defined by Reinhart and Rogoff and the folks from the Troika – tell us that the deficit must be brought down before anything else – and if that condemns countless millions to a decade of unemployment, well, you can't argue with gravity.
It's not that all these experts, politicians and cheerleaders have read Reinhart and Rogoff and were convinced. Their paper happened to encourage what these people intended to do anyway.
In the words of American economist Paul Krugman: "This is deciding what you want to believe, finding someone who tells you what you want to hear, and pretending that there are no other voices."
And so it went. Through the years of austerity, there was always one more sacrifice to be made – and we were already "turning the corner", there were "green shoots", the "plan was working". To question any of this was to say that gravity makes things rise.
Then, three economists at the University of Massachusetts – Herndon, Ash and Pollin – got hold of Reinhart and Rogoff's stats and tried to replicate their work – and they figured it out. Last week, they published a critique of Reinhart and Rogoff.
And, oh boy.
Turns out Reinhart and Rogoff made basic coding errors in their analysis. More significantly, they left stuff out and put stuff in for reasons that – well, no one knows, but the effect was to change the results and not in a good way.
When these errors and oddities are taken out of the equations, the crucial relationship between government debt and growth doesn't stand up. The importance of tackling the deficit above all else is discredited.
Now, we know from what we have seen over the past few years that austerity doesn't work. It makes things worse. We've seen that in practice.
Aha, said the austerity hawks, it may not produce great results in practice, but – by God – the theory is great. Have to stick with the theory.
Eventually, we'll turn the corner.
Now, the theory has fallen apart.
There's more to austerity than Reinhart and Rogoff – but it's the intellectual underpinning of the policies that have hacked chunks out of so many lives. The discrediting of such a central justification for government and Troika policy might be expected to make a bit of noise.
I know it was a busy week. And there's only so much airtime and newspaper space – but, I can find just one piece about this in the Irish Independent's business section, nothing in news or features, and nothing at all in the Irish Times. And probably I missed it, but I wasn't overwhelmed by broadcasts revealing the Reinhart and Rogoff collapse.
Poor old Paul, the Elvis impersonator from Mississippi, got more coverage.
Workers rejected Croke Park II because it promised even more cuts. Brendan Howlin, who was party to policies that have given gifts of over €64bn to the rich, moans that he must still find another €300m in cuts from public sector workers' wages.
Meanwhile, the theory that justifies this whole mad approach – cutting incomes in the depths of a recession, driving down demand, shattering the workforce, driving away skills, obliterating confidence and hope – is revealed to be a complete crock of crap.
And the politicians, and their cheerleaders, just carry on as though nothing has happened.